Financial Media Busy Spinning the Results of Money-Printing

In addition to the diversion of the printer cartridge explosives story, a bit or two of good news has been released in the last couple of days to somewhat buoy a beleaguered administration. This report critiques these and then offers investment-oriented comments.

The first report provides sort-of-good "news" on the economy. It's not dead!

Even better, it's not dying!

The "news" comes in the form of an "op-ed" because it is basically just opinion. The Economic Cycle Research Institute (ECRI) has discerned timely good news for Democrats; from CNN:

The good news is that the much-feared double-dip recession is not going to happen.

That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn’t lead to recession.

What business imperative of its own does ECRI have by announcing this prediction now, thus helping the "ins" rather than the "outs"?

After all, this "information" was provided for free. Voters have no right to timely release of such sensitive information. One would expect that ECRI's paying customers should have access promptly to new research such as the above, but ordinary investors/voters?

Since this is opinion and not fact, color me skeptical about the timing of this release.

It would seem that there can only be one good reason why ECRI released this information now at just the right time, just before the weekend before the election. Not that I'm Sherlock Holmes or even Doctor Watson, but when the impossible is eliminated, what remains, however unlikely, must be the answer. ECRI could have waited for Election Day, if it wanted to take an anti-Fed stand before the Fed meeting, or it could have waited till the Fed actually acted, which might be prudent should the Fed surprise ECRI by being restrained.

One reads the entire "op-ed" by the ECRI leadership and finds harsh criticism of the Fed-- though no recession is imminent--but no criticism of either President Obama or Congress. There is some vague criticism of "politicians" who are fighting each other, but that is politically neutral.

But of course, as we shall see, the Fed is merely doing what all captive central banks due nowadays, which is to monetize the debt of the central government to whatever extent is needed. Yet as we shall see below, the ECRI may just be another pro-deficit spending organization with good forecasting skills in what has become a semi-centrally planned economy.

Let's go back in time with ECRI.

Here is a link to Dr. Achuthan on Jan. 20 on a Reuters video just after the inauguration:

(He says that Mr. Obama has to move quickly to get the stimulus program enacted. ECRI thinks the "stimulus" is very important.)

Yet a mere 3 months later, after weeks of increasing optimism in its news releases, ECRI said:

The longest U.S. recession in more than a half-century will probably end before the summer is out, according to the Economic Cycle Research Institute.

The group, whose leading indicators have a solid track record of predicting turns in the business cycle, said on Thursday enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

"The end of this recession is finally in sight," ECRI said in a statement.

In fact, the ECRI had concluded as much in March . (See slides 17-18.)

Furthermore, while the document may have been dropped from its website, I recall that in spring 2009, ECRI revealed that its (non-publicly reported) Long Leading Indicators, which lead the Weekly Leading Index by months, was turning up either in or about January, raising questions about ECRI's initial support for the stimulus bill.

Where was ECRI in calling for the cancellation of the "stimulus" that it found so important in January, given that it was certain by April of a self-sustaining business recovery?

Obviously very little of ARRA had been spent when confirmation that a normal business cycle upturn was going to happen anyway. There was no Great Depression no way, no-how by January 20. That much ECRI knew for certain. No 2010-legislated stimulus was ever needed to ensure a "recovery", and ECRI knew it.

So I conclude they are just "Keynesians" (i.e. they like money printing) at ECRI and therefore despite being good at what they do, they are working from a faulty ideological framework which will introduce errors in their thinking.

I reject the concept that printing money stimulates anything useful, but I believe that it does transfer wealth from society at large to those who gain transactional income from said money-printing. Thus the financial class writ large has a thrill running up its leg from the immense sea of liquidity provided by the combination of Obama and Fed policies. It's go-go time again in the markets because of the money that has come into the system the past two years.

Meanwhile, Bloomberg.com is also doing its part to cheerlead as best it can to keep the good times rolling for its financial constituents. On its website yesterday, along with a picture of President Obama looking serious, it is running Poll Shows Voters Don’t Know GDP Grew With Tax Cuts.

Bloomberg & Co. should be doing well, and perhaps the Mayor and his company just can't understand that the people are not properly grateful for what the government has done for them, saying in the article:

The Obama administration cut taxes for middle-class Americans, expects to make a profit on the hundreds of billions of dollars spent to rescue Wall Street banks and has overseen an economy that has grown for the past five quarters.

Most voters don’t believe it.

I do believe it but don't think the poll is addressing the main points.

In keeping with John Kerry's recent point that voters are too stupid to deserve to have the right to vote when they are going against his party because they don't understand that the Dems are looking out for them (please excuse the liberties taken with Sen. Kerry's precise quote), we find Bloomberg reporting the following drivel in the same article:

A Bloomberg National Poll conducted Oct. 24-26 finds that by a two-to-one margin, likely voters in the Nov. 2 midterm elections think taxes have gone up, the economy has shrunk, and the billions lent to banks as part of the Troubled Asset Relief Program won’t be recovered.

“The public view of the economy is at odds with the facts, and the blame has to go to the Democrats,” said J. Ann Selzer, president of Selzer & Co., a Des Moines, Iowa-based firm that conducted the nationwide survey. “It does not matter much if you make change, if you do not communicate change.

No, the blame has to go to reality. It's not a failure to communicate. It's a failure to succeed. Where are the geniuses at Bloomberg to point out in this article that the U. S. has probably had the weakest recovery from a major economic downturn in its entire history and that untold millions of jobs have been vaporized (thus keeping the "rate" of unemployment much less threatening than the decline in the employment rate)? Where is the mention that three years or so into the beginning of the euphemistically-called Great Recession, organic per capita income adjusted for inflation is well below that seen three years ago? Isn't that more newsworthy than ECRI's "good news" that there will be no imminent new recession (and why should there be when the depression continues?)? And isn't the failure of Team Obama to "stimulate" the economy the real pre-election news? What about the recent statement by the President that hey, don't blame him, he found out too late that "shovel-ready" projects don't really exist? (And why are they fictions? Might it just be that there are immense bureaucratic blockages to getting anything done? Might not statism be to blame? What's the big deal about repaving a road?)

The Bloomberg article points out that voters (understandably) have trouble distinguishing the TARP accounting from the other bailouts. OK. But so what? Who cares if TARP per se can be given a nominal accounting profit (though far less than Walter Bagehot prescribed for the lender of last resort in a crisis) if the net effect of all the Federal and Fed bailouts, including ZIRP, were . . . bailouts? Handouts to the rich, but only the favored rich, not the upper-middle class "rich". Only the truly rich.

We'll move to the meat of the discussion:

The perceptions of voters about the performance of the economy are also at odds with official data. The recession that began in December 2007 officially ended in June 2009, making the 18-month stretch the longest since the Great Depression. . .

(And we all know that "official data" always reflects the real world experience of real people.)

The impressions of these voters also are dissonant with other signs of economic improvement.
A year and a half after U.S. stocks hit their post- financial-crisis low on March 9, 2009, the benchmark Standard & Poor’s 500 Index has risen 75 percent, and it’s up 15 percent for this year.

So we are now down to brass tacks so far as Big Finance is concerned. For Michael Bloomberg, the cheap money that has flooded into stocks and other financial markets rather than the real economy is a reliable sign of economic improvement that the benighted public somehow misses. Somehow Charlene Miller, referred to earlier in the article, who has been unemployed for two years, is supposed to care whether IBM or McDonald's is doing well in Asia? And let us say that due to the surge in poverty, the deep discounters such as Dollar Tree (DLTR) and Ross Stores (ROST) are able to both have robust sales and high operating margins; good for them, but lower margins would be better for her.

Language can be a slippery thing. Note the term "signs of economic improvement" in the above quote. "Signs" is not "proof". Unfortunately, real "recovery" has not yet occurred.

If you click on http://www.gallup.com/, you will see a form of a "crawl" at the top of the screen. This reflects Gallup's ongoing polling, which given that it is performed daily, is reliable over time and quite consistent. There, you can see that despite the "end" of the "recession", the return of jobs is at a recession level, discretionary spending is at a recessionary level, and the direction in which the economy appears to be going has appeared to the people polled to have continued downward for a remarkable length of time. People still see the economy as getting worse. This, almost a year and a half after the alleged end of the "recession"!

This type of view is supported by every poll I have seen, whether it be the Rasmussen/Discover(R) poll of consumers, ABC News' Consumer Comfort Index, various small business polls, etc.

But stocks are up!

As delineated by a non-conservative, Simon Johnson, in The Quiet Coup in May 2009, what the country endured in the third and fourth quarters of 2008 had perhaps never been seen before in a leading, financially sophisticated country. The intro to his article reads:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund (Ed.: i. e., Johnson), is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.

And from the article:

Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.


Private profits, socialized losses. (And I suspect that the massive private profits have in significant measure been converted from dollars to gold.)

Bloomberg's writers and pollsters must know that the American people "get it". That they don't know all the technical details does not matter.

Let's put aside the suspiciously politically-timed "op-ed" from the co-leaders of the ECRI. Let's ignore anyone such as the Bloomberg types who believe that a second stock market rally following a second crash in seven years has any predictive value for the real economy or reflects success in reconstituting a healthy economy.

Let's recognize that America no longer has a very cyclical economy in the classical sense. All the ECRI and BB discussions of cyclicality miss that point. When so much of economic activity comes from Pedro and Jane transferring some of their work effort to people they never met, and much of the rest of "the economy" (and per the action of gold, all of the gains in the stock market after the panic phase ended) comes from printing of new money above and beyond that needed to meet the demands of the marketplace, then you have an economy that can almost always show "growth". But we defeated the centrally-planned Soviet Union in good measure because of the power of the free market, right? Yes, but that was so long ago . . . In 1990, back when perpetrators of financial crime actually got investigated, prosecuted and convicted.

The problem with "growth" as measured by the ECRI and government statistics is that it does not distinguish between economic activity that meets the current and future needs of real people and real businesses and that which does not. For example, the USSR decided to grow cotton in an arid area south of a major sea. So it drained water from an inland sea and diverted the water to parched regions to grow cotton. All this counted as economic activity. But the result was disastrous. Sometimes it's better to just do nothing than do the wrong thing. No one would seriously argue that we should all break all our windows so that we can stimulate new production of windows, would we? Yet "cash for clunkers" didn't just subsidize new car purchases but it also mandated destruction of used cars that were in service. Wasn't that a version of Bastiat's window-breaking example of economic idiocy?

So as America attempts to regain a level of economic activity that "works" for its people, taking account environmental and social realities, among the worst things to do is to rely on aggregate government statistics that conceal more than they reveal.

Back to the Bloomberg article.

The politicians can claim, Janus-faced, that they have cut taxes, as Bloomberg argues the public is too uninformed or dumb to realize, while with no specific legislation the same political establishment forces prices to rise via the tax of monetary inflation, and they force incomes lower for the vast numbers of people who have money "in the bank" so that the favored banking institutions can continue in business with grossly offensive salaries paid to move the free money around despite creating no wealth other than for themselves. And this low- or no-cost money enhances the profits of multinational corporations with headquarters in the U. S. but that almost universally are planning their growth other than in the U. S.

On Tuesday, the Republicrat/Demopublican Party will win. Deficit spenders will win. Thus money printers will win. Thus Big Finance will win.

Perhaps, because the polls demand it, the pols will get together after the election dust settles and make a deeper bow toward Fiscal Responsibility, but they will not mean it. (Dr. Krugman will yell, though, which will enhance the credibility of said Fiscally Responsible words I believe we can expect to hear soon, and we might just get a bond and dollar rally out of said FR verbiage.)

While the Establishment continues its winning streak, ECRI believes that the economy will continue to suffer, though with an artificial mini-boom due to a new round of money-printing from the Fed ("QE2") that ECRI believes is coming soon.

The American economy is now so unfree, so centrally-influenced/controlled, that it has headwinds against developing real savings that allow for positive dynamics such as strongly positive return on invested capital. And it is increasingly unfree in part because supposedly politically neutral analysts such as Dr. Achuthan come out publicly for deficit spending even when they believe that the economic cycle is pointing upward.

As the antithesis to electronically-printed money that cost nothing to create and in turn creates no real wealth in America (though it may be creating real wealth in Brazil and India (for example), gold and silver are, in fashion terms, the "new black". Except for trading purposes, my view is that it does not matter precisely what the Fed does just after Election Day or which party wins the Senate (apparently the House is going Republican). Just so long as the Fed makes sure that the cost of borrowing short term is way too cheap, and Congress is focused on "jobs" in part via increasing exports and thus favors a weak dollar, I think that gold and silver will be well bid, as they say.

I see the following investment trends with political-economic context. The U. S. can by consent of many countries continue to be the "world's policeman" and for that service and for its willingness to be the importer of last resort can have the right of "seignorage" and continue to have its dollar serve as the world's reserve currency. Part of the payment to the American "policeman" is that said dollar can devalue over time vs. the currencies of exporting nations. Thus the nations that export to the U. S. partially in return for Treasury securities or dollar-denominated cash yielding nothing understand that they will be paid in depreciated dollars relative to their own currencies, which means that they realize they are not receiving stated valued for their exports. So be it. They are patient countries. Their people are grateful for any improvements in living standards. There's no rush on the parts of their country's elites to see things improve too quickly; it's better for the elites that improvement be steady and gradual. It's safer that way.

Along with military services, which may increasingly involve Yemen (and don't be surprised if huge energy reserves are eventually "discovered" there--of course if that occurs they already will have been found), the U. S. does have peaceable exports: high-tech and medical technologies as well as the combination of financial engineering expertise and various best practices management procedures. So along with the export of military equipment and services go the valuable services of industrial and financial companies.

Given the slack in the labor market in the U. S., CPI inflation can stay low for a while longer, especially as the excess dollars the Fed creates bleed away into other countries via the trade deficit, foreign wars, direct investment into the BRICs and elsewhere, and the like.

Various measures of stock buyers' optimism have reached very high levels, so I'd beware of a downturn soon. With that could come a move lower in long-term interest rates and perhaps (finally) a sell-off in silver (which because I and many others would view it as a buying opportunity may not come before another upsurge that fools all the fence-sitters). If indeed the non-USD theme is going to remain in force as a secular trend but the U. S. economy is going to temporarily accelerate due to QE2 coming when it is not needed, then I am going to add a new currency play to the three that I mentioned on September 8 (Norway, New Zealand and Brazil). That is the Canadian dollar (CAD). This can be purchased via the Rydex CurrencyShares Dollar Trust, stock symbol FXC.

ECRI is suggesting some post-election upside "surprises" in the U. S. economy. This will benefit Canada directly and perhaps in a leveraged fashion. Unlike our Fed, the Canadian central bank has already engaged in some interest rate rises, and has paused primarily due to the American slowdown that has fed back to the Canadian economy. Thus while Gentle Ben is predicted by Bill Gross to be on hold with ZIRP till 2013, his counterpart in Canada appears for now to be dealing with a less fragile economy that has a stronger banking system and thus has much less debt to monetize.

In the 1990's, the CAD was being called "the peso of the North" (when the Mexican peso was non-investment grade). Things have changed; click HERE for a detailed review, beginning on p. 14.

The CAD briefly went above $1.10 to the USD in 2008. It is now at 98 U. S. cents. It's easy to see the old high being reached and exceeded "sooner rather than later". I'm an owner of the CAD for several months and also plan to be a new buyer. I like the CAD in part because of its large fossil fuel reserves, and it seems to me that oil and gas prices have lagged the increases in precious metals at this point, so the CAD as well as the Norwegian kroner will benefit if oil joins the inflationary party in a larger way. (I would wait for the euro to descend vs. the USD, however, to favor the NOK over the CAD here, but that's just short-term timing speculation.)

As silver goes a bit parabolic upward, we just may see a sharp "catch-up" move up in somewhat left-behind hard-money-related assets as the Canadian dollar.

It should be an interesting next few days.

Copyright (C) Long Lake LLC 2010

Never Again?

Once again, we are moving farther into Never-Never Land of excessive financial speculation. Why? Point 1 below presents a version of the argument laid out by Dr. Simon Johnson in his 2009 instant classic, The Quiet Coup. Just as rail interests dominated the U. S. post-Civil War, leading to overcapacity, financial panics and numerous railroad bankruptcies, financial interests have overexpanded and have led to numerous financial company collapse; yet their power continues and as their interests derive from volatility and surprises, Fed and Federal policies support Big Finance at the one unthinkable cost of pay cuts to ordinary workers, post-Depression unprecedented financial strains in state and local finances, and zero returns to savers. Here are 3 points laying out a view of how things stand and, first, how they came to be so durable.

1. It's not my usual source for commentary, but Mother Jones (linked to by Naked Capitalism this AM) has quite a summary and screed about Big Finance's influence titled Capital City. Here are some excerpts.

"If you get Chuck Schumer on your side, you are okay," one former SEC official told [16] the New York Times, and that's exactly what the finance lobby has done. The New York Democrat is a member of both the Senate Committee on Finance and the Senate Committee on Banking, Housing, and Urban Affairs, and he's received so much money from Wall Street over the years—more than $14 million—that he actually shut down his personal fundraising efforts between 2005 and 2008. Since then he's raised a staggering $284 million for the Democratic Senatorial Campaign Committee, which he headed until recently, and much of it has come from Wall Street. In June 2007 alone, when lobbying for the carried interest rule reached a fever pitch, employees of private equity firms contributed nearly $800,000 to the DSCC.

It was money well spent: Schumer agreed to support a repeal of the rule only if taxes were also raised on things like venture-capital and real-estate partnerships, a stand that guaranteed resistance from enough interest groups to let the hedge funds' special treatment survive unscathed. A million-dollar investment had allowed the hedge fund industry to keep a billion-dollar loophole. Not a bad return. . .

To get a better sense of just how much money, let's take a virtual stroll down K Street and see what everyone is spending on the world's second-oldest profession. It's all laid out for us by OpenSecrets.org. The defense lobby? Pikers. They contributed $24 million to individuals and PACs during the last election cycle. The farm lobby? $65 million. Health care? We're getting warmer. Health care was the No. 2 industry, at $167 million.

And the finance lobby? They're No. 1, with a very, very big bullet. They contributed an astonishing $475 million during the 2008 election cycle. That's up from $60 million almost two decades ago. . .

After a brief dip in political outlays at the end of 2008, the financial industry spent $402 million in the first 10 months of 2009 on both lobbying and campaign contributions, enough to put them on track to break 2008's record. Members of the House Committee on Financial Services alone received more than $8 million in industry contributions.

Whether the CFPA eventually survives is still up in the air, but the finance lobby scored a big victory almost immediately when Obama's proposal went to Capitol Hill and was quickly stripped of its requirement that banks offer consumers "plain vanilla" products—things like standard 30-year fixed mortgages and low-interest, low-fee credit cards—in addition to their more convoluted options. A couple of weeks later banks with less than $10 billion in assets—a category that includes 98 percent of all US banks—were exempted from the CFPA's scrutiny entirely. And proposals to regulate derivatives by forcing them to be traded on supervised exchanges, as stocks and commodity futures already are, were watered down as well.

How could all this happen so soon after the financial industry's reckless behavior nearly caused a global meltdown? Ironically, it's probably because the bailout was so successful. Without a sense of crisis to drive things, the political will to take on the industry has largely dissipated. Even after nearly destroying the world economy, the finance lobby is, still, simply too big to fight.

Interestingly, the FDR-era reforms that were most appealing to conservatives were probably the financial system reforms, as recounted by then-Judge Pecora in Wall Street Under Oath, a polemic defending these reforms and using that point as one of its key closing arguments.

2. I don't watch much TV, but I saw my first "buy gold" ad in the 6:30 slot on a well-viewed cable news show last night. And then there's this illogic that we started seeing a few years ago in the energy market, when refinery shutdowns, which depress demand for crude oil, reflexively led to rises in crude pricing. Huh? Even Mark Haynes on CNBC questioned that dynamic. Per Bloomberg.com today in Metals Gain as Cold Threatens Output; Yen, Greek Bonds Decline:

Metals rose for a fourth day as icy weather across the Northern Hemisphere threatened to disrupt production. . .

Copper advanced to the highest price since August 2008 at 11:23 a.m. in London and aluminum increased the most since October 2008. . .

Near-record snowfalls and below-average temperatures from Beijing to London closed airports and roads, while the U.S. may suffer its worst winter in 25 years, AccuWeather.com predicted. (Ed.: At which time there was residual concern about global cooling) The freeze may hamper the global economic recovery after the deepest slump since World War II. Investors speculated that China, the world’s biggest aluminum producer, will struggle to maintain output.

“The cold snap in many parts of the world will weigh on gross domestic product,” Steven Barrow, head of Group of 10 foreign-exchange strategy at Standard Bank Plc in London, wrote in an e-mailed note today. “The impact might not be huge but coupled with hints of underlying softness in the global economy’s performance it could raise question marks over recent stock strength and bond market weakness.”

OK again. The cold snap will decrease economic activity and will likely (temporarily) decrease Chinese demand for bauxite (aluminum precursor). How on earth can this cause a rise in raw materials pricing? Yes of course, if production is disrupted, there could be some small increase in finished goods pricing. Not logical.
Only in a world of heavy speculation can this occur.

3. A reader recently passed on some prices, yields and maturities on sovereign debt (let us assume the data are current enough to use the present tense for purposes of discussion). While the U. S. 30 year Govvie its long-term average of about 4.7%, what is astonishing is that Russian and Indonesian debt is almost as dear, running for 20+ years in the 5% range for Russian debt and under 7% for 28 year Indonesian paper. How would you like to lend to Peru with a 2014 maturity at 3.92% per year? Heck, you can get higher yields from Merck or Total, and almost as high a yield as is provided by McDonald's stock. Russia? Peru?

This can only come from a wild abnegation of responsible lending. Remember: who borrows your money has your money. Go sue Russia for it back. Who in his/her right mind would lend hard-earning savings to the Kremlin for 20 years at about 5% per year when one can earn a 5% dividend by owning a piece of the oil giant Total, with retained earning to boot? Any lender bears two risks: credit risk (default) and interest rate risk. Over 20 years, lending to Russia has both of those big-time. But the lender's upside is capped. Sounds like a miserable deal to me. It was only about 20 years ago that Boris Yeltsin stood on a tank fighting off a coup attempt. And it's only a little over a decade ago that Russia "restructured" its debt.

Exactly why so many funds have been and are being created that would allow money to bid up the price of long-term Russian, Indonesian, Peruvian etc. debt, not to mention increasingly aggressive speculation in commodities, can't be known, but it must involve leverage keying off of central bank zero interest rate policies.

What is an investor to do?

In a world where the Fed has floated the idea of issuing its own debt--which of course can be paid off by simply creating the "money" with which to pay it back, the unthinkable is thinkable. Can the S&P 500 reach 2000 in 3-4 years, as I heard touted on CNBC yesterday while exercising? Or could it go to new lows much sooner than 2013?

We need but are not getting a "never again" set of actions from the powers that be.

Copyright (C) Long Lake LLC 2010

In Which I Disagree With a Nobel-Winner

In Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’ , Bloomberg.com reports on the Nobel-winning economist as saying almost nothing that makes sense to this blogger. Here are some quotes (taken out of order as they appear in the writeup) in italics, with my comments in plain text.

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

His history is way off. The U. S. was the world's leading industrial power and leading exporter by World War I. Forget the fall of the Berlin wall: the U. S. has dominated the world scene at least after the events of June 6, 1944 and then the dropping of two A-bombs on Japan in August, 1945. Stiglitz sets up a straw man re "triumphalism". The dominance of the U. S. was demonstrated last fall, when the Great Financial Crisis that began here led to the strengthening of the U. S. dollar. The U. S. will dominate the world scene for years to come.

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

What are "most quarters"? Dollars to donuts not many of those "quarters" are found within the US of A. Unless it is bringing gold into a more prominent role in international finance, what would most Americans say to a world currency? Perhaps fuggedaboutit?

As far as what to do with the Fed's manic actions, that's an internal matter. Going to a global currency wouldn't affect that.

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Assuming the paragraph represents Dr. Stiglitz's views accurately, they appear to show that he has missed at least half a year and perhaps a year. Disinflation has been here since mid-2008 and is a good thing, not a "threat". Deflation (price declines) is here and now. It is incorrect to say that wages may decline; government statistics show that they are declining, through small wage increases combined with a decreased workweek and numerous cuts of wages to zero via layoffs and firings.

Stiglitz, 66, said that while $787 billion in federal government stimulus is propelling growth this quarter, there’s no guarantee the economy will maintain its momentum. On whether the U.S. needs another injection of stimulus, Stiglitz said it’s best to “wait and see.”

“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter,” he said. “But the question going forward in 2011 is the stimulus is coming off, and that’s a negative.”

This expresses the typical distorted view of Keynes' thinking. We barely understand the economy at mid-year (did the "recession" end in June or not?), and the good doctor is already worrying about 2011?

Has any Keynesian ever thought that perhaps businesses are not investing in growth because they have enough capacity? Have they ever tried to reconcile being good to Mother Earth and not continuing to tear raw materials out of her, spend energy making things, etc., when maybe there's enough of those particular things? Have Keynesians forgotten that Lord Keynes was not advocating unending "stimulus" and debt without end?

Thus in the final quote from Stiglitz here, please ask yourself if we need to "consume" more and more autos and gasoline, cheeseburgers, etc., in a society with more motor vehicles than people and an obesity epidemic? (The second sentence in the paragraph is unobjectionable though speculative and is presented for completelness.)

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.

There really only was a paragraph or two of "news" in this lengthy article that taught no one any new facts.

The U. S. consumer is being force-fed autos on credit that many buyers already regret taking on. Home-buyers are back to 3% down mortgages and may use taxpayer money to use an $8000 per first home tax credit as a down-payment. In other words, the Merchants of Debt think they have won. I wouldn't touch their stocks, and neither would I short them. They are Sauron or in a more modern sense the Dark Lord Voldemort.
The times, however, may be a-changin'.

The more the dead hand of government "stimulates" the economy in whatever ways it wants, with minimal economic multipliers, the more it crowds out entrepreneurship and innovation. The tragic part of this is that a truly reformed financial system could be part of an economic rebirth rather than an agonizing coda to an era that ended with GM's bankruptcy and that should have ended with AIG's and Citigroup's bankruptcies. Instead the U. S. has gone the path of Japan a decade ago, with zombie banks and massive Fed money-printing that is not truly Zimbabwean printing of currency (which is inflationary) but which instead is debt that accrues rather than getting written down to realistic levels and therefore has proven deflationary to date. If you have not, please read when you have several minutes the now-classic Simon Johnson article titled The Quiet Coup from May 2009. It's the single most important article-length read of the entire past two years that I have seen.

There will be no willing reform in the U. S. Therefore there will be much more volatility and crises, but with a pattern that Big Finance will hide. Is resistance futile?

I think not. Traders should go with the flow and not fight the tape or the Establishment; investors should ignore all the chatter that is meant to distract them and get them to over-trade and doubt their decisions no matter how well-thought-out they are.

Copyright (C) Long Lake LLC

The Intelligentsia Opines: U. S. as Russia-tina

Two recent articles have surfaced, each written by former IMF economists, one of whom is also an MIT professor and the other of whom has spent time with Big Finance, each comparing the U. S. to such countries as Argentina or Russia during their various economic crises. Here are links to each with small snippets. The first of these is very well written and easily digested in one sitting.

From "The Quiet Coup", by Dr. Simon Johnson (published by The Atlantic Monthly)

(Intro): The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time. . .

Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . .

From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man).

Similarly, Desmond Lachman pens "Re-Emerging as an Emerging Market" (Washington Post), which begins:

Back in the spring of 1998, when Boris Yeltsin was still at Russia's helm, I led a group of global investors to Moscow to find out firsthand where the Russian economy was headed. My long career with the International Monetary Fund and on Wall Street had taken me to "emerging markets" throughout Asia, Eastern Europe and Latin America, and I thought I'd seen it all. Yet I still recall the shock I felt at a meeting in Russia's dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia's economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia's economic czar at the time.

At the time, I could not imagine that anything remotely similar could happen in the United States. Indeed, I shared the American conceit that most emerging-market nations had poorly developed institutions and would do well to emulate Washington and Wall Street. These days, though, I'm hardly so confident. Many economists and analysts are worrying that the United States might go the way of Japan, which suffered a "lost decade" after its own real estate market fell apart in the early 1990s. But I'm more concerned that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we're trying to fix it.

Finally, another Obama supporter (gingerly) criticizes him for his latest bail-out plan, in a Naked Capitalism post:

Guest Post: The new bailouts are an end-run around Congress

Submitted by Edward Harrison of the site Credit Writedowns

Edward Harrison here. What follows is a post I wrote for Credit Writedowns last night. Before I present the post, I want to make a few editorial comments, however.

First, for full disclosure, I support Barack Obama. I voted for him, campaigned for him and contributed to his run for office. I am happy to see him as President.

Nevertheless, he is now making policy that affects us all. As a blogger, I am required to show some objectivity in analyzing his policy decisions. I am not altogether content with that policy and my articles do reflect this.

The Harrison article is a bit lengthy and thinly edited. It presents the Obama-Geithner bank bailout plan in the context of another end-run around Congress, namely the 1995 Mexico bailout engineered by Treasury and the IMF; the legality of the current plan is questioned. It is presented here because it documents the continued flow of Obama supporters who have seen that his policies toward Big Finance are essentially those of George W. Bush, and have begun to criticize him by name. This continuity of policy has been emphasized by this blog since its founding. I continue to believe that Mr. Geithner belongs elsewhere, and should be replaced by someone more adversarial to large complex financial institutions.


Copyright (C) Long Lake LLC 2009